‘Expo effect’ to support faster growth in the UAE

The global trade fair is likely to provide a boost to consumption spending over the next two quarters

Expo 2020 has already contributed to an improvement in UAE's business conditions in October. Antonie Robertson/ The National

The UAE economy is set for a faster growth in the final quarter of 2021 after a relatively slow start to the year.

The relaxation of travel restrictions in key tourism markets, including the UK and Saudi Arabia, is supporting a recovery in the travel and hospitality sectors in the UAE – and Expo 2020 Dubai has already contributed to an improvement in business conditions in October.

The UAE Purchasing Managers' Index, a composite indicator designed to give an overview of operating conditions in the non-oil private sector, rose to the highest level in more than two years in October as businesses reported strong growth in activity and new work, which many attributed to the start of Expo 2020. Businesses were also more optimistic about their future output than they have been since the start of the pandemic last year.

However, the improvement in demand last month has not yet fed through to faster job growth in the UAE’s private sector. The employment component of the PMI survey showed only a slight increase in October, similar to the September reading. To some extent, the reluctance to boost hiring is a natural response to the increased costs faced by many businesses due to supply chain disruptions and higher raw material prices.

This is leading to a build-up in the backlogs of work and we expect firms will need to increase hiring in the coming months if demand continues to remain robust.

Expo 2020 is also likely to provide a boost to consumption spending over the next two quarters. A consumer confidence survey by Dubai’s Department of Economic Development showed that consumers were more optimistic about their job prospects, their finances and the state of the economy in the third quarter of 2021 than they have been in several years.

Bank lending to individuals has also increased this year following deleveraging in 2019 and 2020, providing further evidence of a recovery in consumer spending in the UAE. Emirates NBD expects the non-oil economy to post growth of 3.5 per cent in 2021, accelerating to 4 per cent in 2022.

Developments in the oil market are also likely to boost headline gross domestic product growth in the fourth quarter of 2021 and through to 2022.

The UAE’s oil production has increased by 100,000 barrels per day since the end of June and is on track to reach 2.9 million bpd by the end of the year.

Oil production is likely to continue to rise in 2022 as Opec+, the oil exporters' bloc, gradually unwinds its Covid-related production cuts. As a result of this increase in oil production as well as further investment into the UAE’s oil and gas sector, headline GDP growth is likely to accelerate to 4.6 per cent in 2022 from an estimated 1.9 per cent this year.

As in the rest of the world, inflation in the UAE is accelerating, although it remains relatively low.

The Consumer Price Index (CPI) grew 0.5 per cent year-on-year in August – the first positive annual inflation rate since December 2018. Food and transport have been the main sources of inflation in the UAE in recent months, with the latter driven by higher crude oil prices.

However, food prices in the UAE are still lower than they were a year ago. Housing and utility costs – the biggest component of the CPI – remain deflationary, but the rate of price decline has slowed.

It can take 12 to 18 months for changes in rents to feed through to the CPI due to the nature of the index. Nevertheless, inflation in the UAE is likely to continue to tick up, averaging zero per cent in 2021 and accelerating to 1.5 per cent in 2022.

While the near-term outlook for the UAE is certainly brighter, uncertainty remains high and there are several risks on the global horizon. The coronavirus pandemic remains the largest source of uncertainty, with new cases still high in Europe, the UK and the US, the global vaccine roll-out remaining highly uneven and the ever-present risk of new potentially vaccine-resistant variants.

Global growth is slowing on the back of labour shortages and supply chain disruptions, while central banks are starting to withdraw the exceptional monetary support they have provided over the past 20 months.

The US Federal Reserve started tapering its asset purchases this month and markets are pricing in two rate hikes by the Fed before the end of 2022. If the markets are correct, tighter monetary policy could put a further brake on growth next year.

Khatija Haque is chief economist and head of research at Emirates NBD